Choice for Israel Bank Chief Approved by a Split Cabinet

Over the objections of Israel's finance minister, the cabinet tonight narrowly approved Prime Minister Ehud Barak's choice of a conservative central bank economist as the bank's next governor.

David Klein, who now heads the central bank's monetary affairs division, was endorsed in a 10-to-7 vote after a long afternoon of contentious debate that exposed stark economic-policy divisions in Mr. Barak's center-left coalition.

Five leading cabinet members abstained, including Finance Minister Avraham Shochat, marking the first time that an Israeli central bank governor had been selected without finance ministry support. Foreign Minister David Levy also declined to support Mr. Barak's nominee.

Many institutional investors here applauded the appointment of Mr. Klein, which they saw as an assurance of the continuation of the policies the previous governor, Jacob Frenkel had enforced during his eight-year tenure.

Of the several candidates who were considered for the post, Mr. Klein was regarded as philosophically the closest to the hard-line monetarism of Mr. Frenkel, who resigned last week to take a London-based job at Merrill Lynch.

Like Mr. Frenkel, Mr. Klein is an American-educated former staff economist at the International Monetary Fund who is known for his opposition to inflation and to intervention in foreign-exchange markets.

Opposition to Mr. Klein ran deepest within the prime minister's own party, which ran in the last election on a platform advocating lower interest rates and faster economic growth. Those goals are unlikely to be priorities for Mr. Klein, a career central bank technician who embodies his institution's resistance to anything that smacks of inflationary expansion.

Personal appeals from Mr. Barak persuaded key ministers from his party, One Israel, to back away from their earlier-announced intention to vote against Mr. Klein. One of them, Haim Ramon, who is assigned to the prime minister's office, said later that he changed his decision only in deference to Mr. Barak. ''I still think that Mr. Klein was a bad appointment,'' he said, ''but what stood in the balance was the great blow that a loss would have represented for the prime minister.''

Having received the required cabinet endorsement, Mr. Klein is to be sworn in on Monday by President Ezer Weizman to a five-year term.

Mr. Barak's nomination of Mr. Klein for the bank governorship signaled a continuing commitment to strict anti-inflation policies at a time when inflation here has fallen to its lowest level in a generation.

The Central Bureau of Statistics said Friday that the cost-of-living index rose just 1.3 percent in 1999, half the United States rate and the smallest annual increase since 1967.

In contrast, the base lending rate fixed by the central bank is a stiff 10.7 percent. Maintaining high real interest rates of 9 percent or more is defended by economists who share the bank's fears of resurgent inflation, but assailed by industrialists and politicians who blame the bank's polices for three consecutive years of flat or lower per-capita incomes.

The stock market jumped several points when Mr. Barak announced his choice, though market analysts said later that stock prices could suffer if Mr. Klein resists pressure to ease interest rates.